Working capital is key to a sustainable business model for professional services firms, yet constructing an approach to increasing this can be overwhelming. There are a number of tactics that firms in this sector can employ, including:
- Avoiding using working capital to pay for fixed assets. This can quickly drain your cash reserves, which could also have a knock-on effect in how your business is viewed externally.
- Borrowing to directly increase working capital. Tapping into long-term credit lines lets you invest and grow your company without depleting your cash position.
- Avoiding stockpiling of inventory. Inventory is a key element of the working capital equation and the more inventory you hold, the lower your working capital will be.
- Automating payments monitoring. Having transparency over your payment flows is vital if you are going to effectively track late-paying customers who are a drain on working capital. Automating the monitoring process makes this simple.
- Investigating tax incentives open to your company. There may be tax options open to you that could save you money. These savings can then be ploughed into the working capital of the business.
These tactics may or may not be relevant to your business depending on a variety of factors, such as the appetite to take on debt and the availability of a budget to invest in new automated systems.
One obvious way to increase working capital is to collect payments for goods and services as soon as possible. This is easier said than done, however, as simply invoicing earlier or shortening defined payment terms could easily jeopardise valued client or supplier relationships that have been built up over years. One way to make this work for both buyer and supplier is to employ a third party working capital solution from a financial services provider.
When using a third party solution the ordering and invoicing procedures of your professional services company will tend to remain exactly the same. The key difference is that the financial services provider will pay you early while affording your customer generously longer payment terms. This accelerates cash generation, increasing your working capital which in turn can drive business growth, while also improving the cashflow of your customer.
As a buyer, a programme like this can also diversify your capital resources and reduces the need for external financing. It can help extend accounts payable. On the supplier side, it enhances your ability to meet market demand and allows access to incremental funds. As well as opening up faster and easier customer payments, it reduces the administration that many firms face related to credit control.
Discover the benefits of working capital solutions with American Express here.